Title: Leveraged loans: is high leverage risk priced in?

Authors: David P. Newton; Steven Ongena; Ru Xie; Binru Zhao

Addresses: School of Management, University of Bath, Claverton Down, Bath, BA27AY, UK ' Swiss Finance Institute, University of Zurich, Switzerland; NTNU Business School and CEPR KU Leuven, Belgium ' School of Management, University of Bath, Claverton Down, Bath, BA27AY, UK ' Bangor Business School, Hen Goleg, College Rd, Bangor LL57 2DG, UK

Abstract: We investigate the impact of the 2014 Interagency Clarification on the leverage risk premium for bank- and non-bank-originated loans. Using a novel dataset from 2011 to 2019, we show that leveraged loan spreads have declined rapidly for non-bank facilities relative to bank facilities since the introduction of the 2014 Interagency Clarification. The decline in leveraged loan spreads is significant for highly leveraged borrowers, especially when term loans are involved. We further demonstrate that a higher degree of information asymmetry, driven by an increase in covenant-lite loan issuance and weaker investor protection, is strongly associated with a narrower leverage risk premium.

Keywords: leverage risk; syndicated loan pricing; leveraged loan; information asymmetry.

DOI: 10.1504/IJBAAF.2025.146550

International Journal of Banking, Accounting and Finance, 2025 Vol.15 No.1/2, pp.120 - 138

Received: 15 Dec 2023
Accepted: 23 Jul 2024
Published online: 02 Jun 2025 *

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